The Ontario Securities Commission has permanently banned the former chief financial officer of Sino-Forest Corp. from serving as a director or officer of a public company.

David Horsley, who served as CFO from 2005 until 2012, has also agreed to pay a $700,000 fine and testify in the ongoing Sino-Forest case.

Sino-Forest once had a high-flying stock that traded on the Toronto Stock Exchange, until in June 2011 short seller Muddy Waters suggested the forestry company’s sales were a fraud, calling it a giant Ponzi scheme.

Short-sellers gamble on the price of a stock going down, and make money when that happens.

At its peak, Sino-Forest had a market capitalization of more than $6 billion, with shares trading at $25.85. But after the Muddy Waters report, the share price began to plummet, winding up at $4.81 when the OSC halted trading in August 2011.

By April 2012, auditors Ernst and Young had resigned and in May 2012, the TSX delisted the shares.

The OSC alleges the company, headquartered in Mississauga, and its executives in China “engaged in numerous deceitful and dishonest courses of conduct that ultimately caused the assets and revenue derived from the purchase and sale of standing timber to be fraudulently overstated.”

Horsley was responsible for the oversight of all financial aspects of the affairs of Sino-Forest, though most documents and contracts were in Chinese. He had the ultimate responsibility for the integrity of Sino-Forest’s financial reporting.

As part of his deal with the OSC, Horsley admitted to his failure “to exercise the skill, care and diligence required of him as CFO of Sino-Forest” that permitted Sino-Forest to make materially misleading disclosure.

He also admitted that when he certified the annual and interim filings of Sino-Forest, they were materially misleading.

“This is a significant settlement and a significant admission by Mr. Horsley,” said OSC lawyer Hugh Craig at a hearing on Monday.

“This should serve as a message to CFOs operating in unfamiliar business environments” of the need to be vigilant, Craig added.

“He simply didn’t do his job,” he said. “Operations may be over there, but they are regulated under the Ontario Securities Act.”

Panel vice-chair James Turner said chief financial officers play a critical role in the financial reporting of companies, noting Horsley failed in his role and as a result failed investors and capital markets.

In approving the deal, Turner said it was contingent on the settlement of a separate class action lawsuit involving both Sino-Forest securities and bond holders.

Judges in Ontario and New York state are scheduled to hear the settlement proposal on Thursday, and may sign off on the plan for Horsley to pay $5.6 million to benefit investors.

Turner said without that payout offer, the OSC deal with Horsley would not be acceptable to him.

“These sins, if I can put it that way, are sins of omission as opposed to sins of commission,” Wardle added.

Horsley, who did not speak at the OSC hearing, apparently recognized the need for Sino-Forest to have a CFO based in Hong Kong, who would be more involved in Sino-Forest’s operations and also fluent in Chinese.

According to the settlement agreement, Horsley tendered his resignation in April 2011, before the Muddy Waters report, but the board asked him to withdraw his resignation, which he did.

When the Sino-Forest story first emerged, it was a warning signal to Canadian companies with operations overseas.

“The entire Sino-Forest situation made Canadian-based executives of operational entities overseas take a gulp, and their auditors as well,” said Steven Salterio, a professor at the Queen’s University School of Business.

“More travel was authorized in the months following that than in the previous five years,” he said, noting financial officials and auditors have serious reporting duties and need to oversee operations.

Because of cost-cutting measures, there had been a reliance on local affiliates of firms, Salterio said.

Salterio added that the Sino-Forest case highlights that chief financial officers are in charge of financial reporting and controls as well as certifying all financial reports.

“This is a cautionary tale for the chief financial officer,” he said, adding that those who act more like chief fundraising officers, focused on raising funds and capital, must remember they are still have day-to-day financial reporting duties.

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